Are you retired? Do you ever wonder if there are any special tax deductions available to you? Retired individuals often feel their financial affairs are on cruise control once they retire since they’re on a fixed income.
There may, however, be some tax deductions that you may not be aware that you’re eligible for and not taking advantage of. The purpose of this blog post is to bring to light some tax tips specifically for retirees. Here they are:
1. Standard Deduction
When you turn 65, the IRS gives you a little bit of an added bonus in the form of a larger standard deduction.
For example, in tax year 2016 a 64-year-old individual will get a standard deduction of $6,300. A 65-year-old would be able to deduct $7,850 as their standard deduction for 2016. For individuals in the 25 percent bracket, that equates to just under $400 in savings.
2. Medicare Premiums
Many individuals retire and start a small business as a self-employed individual. These individuals are eligible to deduct their Medicare premiums without limitation of the medical threshold.
This is a great benefit for those seniors who want to keep busy during retirement. There are some additional limitations, for example if your spouse is still working and you’re covered under their employer-sponsored plan, the deduction would not be available to you.
3. Medical Threshold
2016 is the last year that seniors will receive a break on the deductibility of medical expenses as an itemized deduction.
For taxpayers 65 and older, medical expenses are deductible as an itemized deduction once they exceed 7.5% of their AGI. For younger individuals that threshold is 10% and 2016 is the last year seniors get this break.
4. Spousal IRA
If you are married and your spouse still works while you’re retired your spouse can contribute up to $6,500 into an IRA that you own. You can do this until you reach 70 ½.
If you’re utilizing Roth IRA’s, there is not an age restriction as long as your spouse has enough earned income to fund the contribution.
5. Use RMDs For Withholding
If you don’t need your Required Minimum Distribution (RMD) amount(s) to live on, consider taking your RMD towards the end of the year and designate the RMD amount as federal withholding.
The IRS considers this type of withholding as being received evenly throughout the year and does not assess a penalty on not making quarterly estimated tax payments. This will allow you to hold onto your money a little longer without penalty.
6. Double Up On Charitable Contributions
Many retired individuals have their homes paid off and don’t have mortgage interest, make charitable contributions, and pay the property tax on their homes. This combination usually means the retired individual is close to having enough deductions to itemize but not quite enough.
Utilizing a strategy where you prepay your next year’s charitable contributions will allow you to realize the tax advantage of itemizing every other year.
7. Charitable IRA Transfers
Consider using your RMD as a Qualified Charitable Distribution to make a charitable contribution. This will allow you to (1) meet the RMD requirement, (2) exclude the amount of the contribution from income, and (3) donate to the charity of your choosing.
Excluding the amount of the distribution from income often provides more of a tax benefit than taking the distribution and then deducting the contribution as an itemized deduction.